Sunday, April 29, 2012

"In my view, the Commerce Department's practice of including all war product in real GNP is valid for the analysis pursued in this article. Just as military personnel were considered usefully employed for computing the unemployment rate for the total labor force, government purchases of their services and of other war goods and services were product, and product that was necessary for preserving the nation, its institutions, and its social fabric in the face of an external threat."

Vernon, J.R. 1994. "World War II Fiscal Policies and the End of the Great Depression". The Journal of Economic History. 54(4) p. 854.

27 comments:

I don't think this really engages Robert Higgs' reason as to why he doesn't include war expenditure. Higgs sees war expenditure as capital consumption by an institution fundamentally different than other market institutions. Vernon might think that WWII preserved "the nation, [et. al.,]" against an external threat (something Higgs vehemently -- and I think anybody with real knowledge of WWII -- disagrees with), but that doesn't change the economic nature of government capital consumption.

I don't understand why being a fundamentally different institution means the production you purchase doesn't get counted in with the total count of the production others purchase. Could you explain?

I think Vernon does just fine addressing Higgs (you may be interested in the whole discussion of Higgs's article in the paper).

Higgs's point was somewhat different too - he was pointing out that private consumption levels were low during the war. That's obviously true, but you can make that point without making the much less defensible point that government spending shouldn't be counted in GNP. That's the distinction Vernon is making.

Dan, businesses' productivity is measured by how much other people voluntarily spend on their goods and services. Government's productivity is measured by how much it spends. Right off the bat, the two seem very different, and when you think about it, only one of them actually appear productive.

Dan, I know real output is what counts. But that real output is bought voluntarily by society. The more society spends on a good relative to its costs, the higher a business' value productivity, and hence profitability is. Government expenditure does not, and cannot measure its productivity in the same way as the market, because it does not earn its revenue like the market. And so, governments productivity, or contribution to real income, is.erroneously measured by how much it spends. And you can't really say people demanded war, considering FDR had to lie during reelection and coax Japan into attacking us.

Firms who produced for the government made pretty decent profits, workers earned wages. Its not quite clear what point you are trying to make that government did not contribute to "real income" (a term I think you are abusing) by purchasing goods and services.

Now if you want to argue that the government did not pay some kind of price that coincided with some kind of marginal cost or product or whatever that's slightly different. However, it's irrelevant national accounting is the measure of output and income at current prices, it doesn't have that kind of value judgement for its basis.

Higgs spends a lot of time working though Kuznets failure to come up with a "welfare" basis for NIPA.

There was considerably more destruction of the means of production in the South, as well as near-hyperinflation. That was the origin of a lot of the problems (to say nothing of the significant institutional changes in the South) then and that didn't apply in WWII.

Other than that I'm not sure the economy stagnated. No recessions coincided with those wars. Like WWII, a lot of production was diverted away from private consumption so peoples' lives became more austere. But that seems like a different point to me.

"Industry in the North in the Civil War and overall in WWI stagnated relative to previous growth trends. Inflation, government spending, taxes, wartime production all took their course."

So you are once again not counting production how we usually count production. Yes, I agree, if you choose to exclude war production obviously the economy was "stagnant". If you choose to exclude war production in WWII it was stagnant then too.

I'm not in a position right now to dig up pig iron statistics and manufacturing data, but I always thought it was clear that industry was hampered during the Civil War. High inflation, taxes, government spending etc, all crippled private investment. I'm not even sure if industrial production rose overall during the war years, but I could be wrong.

And in World War I, switching gears from the United States, just considering Britain (to rule out the argument that infrastructure was destroyed in Germany/France), real wages stagnated, industrial production fell, real GNP barely rose since pre war, etc.

The Panic of 1857 was the nearest recession. Considering how people thought panics lasted for years on end back in the days, I've heard the argument that the civil war stimulated industrial expansion and got the country out of the post panic recession.

Dan, I understand what you are saying. My point is that Government expenditure isn't "productive" in the same sense of the marketplace, and that, rather as treating government spending as productive, it needs to be counted as a burden. As a result, government wartime production in an economy, ceteris paribus, always stagnates an economy relative to what would have occurred had the wartime economy not taken place. The wartime prosperity in the 40s in a myth.

I thought we established several comments back that you are not talking about productivity. Presumably you are trying to make some comment about the value or welfare generated by government spending, but:

"Dan, I know real output is what counts. But that real output is bought voluntarily by society. The more society spends on a good relative to its costs, the higher a business' value productivity, and hence profitability is. Government expenditure does not, and cannot measure its productivity in the same way as the market, because it does not earn its revenue like the market. And so, governments productivity, or contribution to real income, is.erroneously measured by how much it spends. And you can't really say people demanded war, considering FDR had to lie during reelection and coax Japan into attacking us."

My response is based off of Rothbard (The Fallacy of the Public Sector)

"Apart from the public sector, what constitutes the productivity of the "private sector" of the economy? The productivity of the private sector does not stem from the fact that people are rushing around doing "something," anything, with their resources; it consists in the fact that they are using these resources to satisfy the needs and desires of the consumers. Businessmen and other producers direct their energies, on the free market, to producing those products which will be most rewarded by the consumers, and the sale of these products may therefore roughly "measure" the importance which the consumers place upon them. If millions of people bend their energies to producing horses-and-buggies, they will, in this day and age, not be able to sell them, and hence the productivity of their output will be virtually zero. On the other hand, if a few million dollars are spent in a given year on Product X, then statisticians may well judge that these millions constitute the productive output of the X-part of the "private sector" of the economy.

One of the most important features of our economic resources is their scarcity: land, labor, and capital goods factors are all scarce, and may all be put to various possible uses. The free market uses them "productively" because the producers are guided, on the market, to produce what the consumers most need: automobiles, for example, rather than buggies. Therefore, while the statistics of the total output of the private sector seem to be a mere adding of numbers, or counting units of output, the measures of output actually involve the important qualitative decision of considering as "product" what the consumers are willing to buy. A million automobiles, sold on the market, are productive because the consumers so considered them; a million buggies, remaining unsold, would not have been "product" because the consumers would have passed them by.

Suppose now, that into this idyll of free exchange enters the long arm of government. The government, for some reasons of its own, decides to ban automobiles altogether (perhaps because the many tailfins offend the aesthetic sensibilities of the rulers) and to compel the auto companies to produce the equivalent in buggies instead. Under such a strict regimen, the consumers would be, in a sense, compelled to purchase buggies because no cars would be permitted. However, in this case, the statistician would surely be purblind if he blithely and simply recorded the buggies as being just as "productive" as the previous automobiles. To call them equally productive would be a mockery; in fact, given plausible conditions, the "national product" totals might not even show a statistical decline, when they had actually fallen drastically.

And yet the highly-touted "public sector" is in even worse straits than the buggies of our hypothetical example. For most of the resources consumed by the maw of government have not even been seen, much less used, by the consumers, who were at least allowed to ride in their buggies. In the private sector, a firm's productivity is gauged by how much the consumers voluntarily spend on its product. But in the public sector, the government's "productivity" is measured—mirabile dictum—by how much it spends! Early in their construction of national product statistics, the statisticians were confronted with the fact that the government, unique among individuals and firms, could not have its activities gauged by the voluntary payments of the public—because there were little or none of such payments. Assuming, without any proof, that government must be as productive as anything else, they then settled upon its expenditures as a gauge of its productivity. In this way, not only are government expenditures just as useful as private, but all the government need to do in order to increase its "productivity" is to add a large chunk to its bureaucracy. Hire more bureaucrats, and see the productivity of the public sector rise! Here, indeed, is an easy and happy form of social magic for our bemused citizens."

A lot of people seem to see total output as simply the yield to total capital, just as the profit from an investment varies with the investment. But, it isn't just that. In a short-run situation output is something that's decided by consumer preferences and government policies. A particular level of short-run output doesn't demonstrate a corresponding sustainable level of long-run output.

Let's suppose that at the beginning of a war there is a stock of capital goods in a country. The government buys weapons for the war. As a result some capital is consumed. Now, that may lead to a rise in output, but what about the cost to future output caused the capital consumption?

It could be argued that GDP statistics take this into account. I would argue that they don't take it into account adequately. I can describe that argument in more detail if people are interested.

Definitely. It still seems to me that Vernon made the right choice in counting real GNP.

I'm not sure how much capital consumption actually went on. Presumably some, but the strong post-war growth seems to suggest that not a whole lot did. Still, I definitely agree with you and Jonathan that output and sustainable output are two quite different things. Unless I'm misunderstanding something, though, this does not imply at all that Vernon made the wrong choice. Hopefully you and Jonathan agree with me on that as well.

It's true that there was strong growth after WWII, this doesn't mean that there couldn't have been stronger growth without WWII.

What is the right measure depends on what were interested in. I remember having this discussion with Anthony Evans. He mentioned a colleague of his who said that GNP shouldn't interest us and we should use consumer spending instead because that's a measure of the wealth of the population. Anthony said well in that case we should use consumer surplus. That's true for measuring the result of long run changes, for measuring "material progress".

Output measures, like GNP and GDP are about estimating how things are going by looking outside of consumer goods. By looking at investment goods too as a proxy for future consumer goods. There is a lot to be said for doing this, but it's necessarily inaccurate. The prices of capital goods are principally tools of entrepreneurial calculation, using them to estimate the future is dicey. Mises discusses this problem in Human Action p.520-522, as far as I can remember. I'm sure Post Keynesians have reams to say on the matter. Statistics bear this out, if you look at the investment series in the Penn World Tables, they don't predict the future of the consumer goods series well, or the growth series well.

Using the prices of investment is likely to be particular dubious in a situation where the government are spending a lot of money which pushes up the value of investment goods (existing and new). So, the output we get isn't likely to be the same as sustainable output.

1. You still seem to be confusing income and value.2. You still haven't explained why government spending on stuff isn't what people want.

We all know why it might not be. But there's good reason to believe much of it is what people want. And there are lots of reasons why some spending in the market might not represent stuff that people, and we certainly don't stop counting those sales for that reason.

1.As I explained earlier: (the reason I keep posting this, is that, no one directly replied to it)

Dan, I know real output is what counts. But that real output is bought voluntarily by society. The more society spends on a good relative to its costs, the higher a business' value productivity, and hence profitability is. Government expenditure does not, and cannot measure its productivity in the same way as the market, because it does not earn its revenue like the market. And so, governments productivity, or contribution to real income, is.erroneously measured by how much it spends. And you can't really say people demanded war, considering FDR had to lie during reelection and coax Japan into attacking us.

And again, the Rothbard quote.

Businesses gauge their productivity to society by their profitability, i.e, how much people spend on their product relative to their costs. A business isn't productive, even if its output is exploding and costs rapidly declining, if no one buys their product, and they are unprofitable. Real income, i.e, trying to calculate the amount of real goods and services produced, only matters if people want those goods and services (and voluntarily buy them). The bottom line is real income isn't just measuring "stuff", its measuring stuff that people want and buy.

2.As said earlier, unlike business, government does not earn its revenue (or the vast majority of it) from other people purchasing what they produce. Instead they earn it from taxation, debt, or inflation (debt must resolve into future taxes or inflation). So instead of people spending their money on what they value the most, government instead taxes some of it and spends it on what they deem people want (which satisfies their own consumption). Government does not run by profit and loss and therefore cannot calculate the feasibility of enterprises similar to business. If people did want what the government produced, the government wouldn't need to make those goods and private business could make them.

"And there are lots of reasons why some spending in the market might not represent stuff that people, and we certainly don't stop counting those sales for that reason."

did you mean to say "not represent stuff that people [want]?". Could you give an example? If people don't want something, it becomes unprofitable and the firm goes out of business.

1.As I explained earlier: (the reason I keep posting this, is that, no one directly replied to it)

Dan, I know real output is what counts. But that real output is bought voluntarily by society. The more society spends on a good relative to its costs, the higher a business' value productivity, and hence profitability is. Government expenditure does not, and cannot measure its productivity in the same way as the market, because it does not earn its revenue like the market. And so, governments productivity, or contribution to real income, is.erroneously measured by how much it spends. And you can't really say people demanded war, considering FDR had to lie during reelection and coax Japan into attacking us.

And again, the Rothbard quote.

Businesses gauge their productivity to society by their profitability, i.e, how much people spend on their product relative to their costs. A business isn't productive, even if its output is exploding and costs rapidly declining, if no one buys their product, and they are unprofitable. Real income, i.e, trying to calculate the amount of real goods and services produced, only matters if people want those goods and services (and voluntarily buy them). The bottom line is real income isn't just measuring "stuff", its measuring stuff that people want and buy.

2.As said earlier, unlike business, government does not earn its revenue (or the vast majority of it) from other people purchasing what they produce. Instead they earn it from taxation, debt, or inflation (debt must resolve into future taxes or inflation). So instead of people spending their money on what they value the most, government instead taxes some of it and spends it on what they deem people want (which satisfies their own consumption). Government does not run by profit and loss and therefore cannot calculate the feasibility of enterprises similar to business. If people did want what the government produced, the government wouldn't need to make those goods and private business could make them.

"And there are lots of reasons why some spending in the market might not represent stuff that people, and we certainly don't stop counting those sales for that reason."

did you mean to say "not represent stuff that people [want]?". Could you give an example? If people don't want something, it becomes unprofitable and the firm goes out of business.